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Bet your Boots! Receipt of Boot Does Not Poison 1031 Exchange

July 18, 2023 (3 min read)

Boot is an old English term meaning "something given in addition to.” In tax lingo, it means cash or non-cash consideration, including other property that is not "like-kind," like promissory notes, debt relief (mortgage boot), or other property. When structuring a sale or exchange of property (real or personal) that is eligible for tax-free treatment under I.R.C. § 1031, gain realized on the exchange is recognized (reported) to the extent of the boot received. Although the receipt of boot does not invalidate nonrecognition treatment, you may pay taxes at the federal and state level on boot proceeds. Learn more by accessing our 1031 Like-Kind Exchange Resource Kit.

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Related Content

  • Basic Tax Considerations in Divestiture Transactions
    See how the concept of boot is key in tax-free sales of an organization. For example, to structure a sale as a tax-free reorganization under I.R.C. § 368(a), the reorganization must satisfy the requirements of (1) continuity of business enterprise, (2) business purpose, and (3) continuity of interest. The continuity of interest requirement requires that a certain number of target shareholders continue to own an equity interest in the buyer following the transaction, generally interpreted to mean that no more than 60% of the purchase consideration can be in cash or property (boot) other than buyer stock. 
  • M&A Tax Considerations for C Corporations
    Learn more on how the receipt of boot can undermine a B reorganization. In a B reorganization, the purchasing or acquiring corporation uses only voting stock to acquire the controlling interest of another corporation. So, success of a B reorganization prohibits the use of boot ("no boot in B").

Practical Guidance Updates 
Featuring the latest updates from your Practical Guidance account. 

  •  Tax Key Legal Developments Tracker (Federal)—keep up to date with key legal developments!
    • Business Entities: IRS and Treasury issue additional final regulations providing guidance on the transition away from the use of interbank offer rates (IBORs) to other reference rates. The final regulations provide the replacement rate for the IBOR presently used in the published rate election, which may be used by taxpayers to determine the amount of interest expense attributable to their excess U.S.-connected liabilities allocable to income that is effectively connected with the conduct of a trade or business within the United States. 88 Fed. Reg. 42231 (June 30, 2023).
    • Business Entities: IRS confirms with issuance of transitional guidance that no taxpayer is required to report the new excise tax imposed by R.C. § 4501on repurchases of corporate stock during a covered corporation’s taxable year (stock repurchase excise tax) on any returns filed with the IRS, or to make any payments of such tax, before regulations are issued. Announcement 2023-18.

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